SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2001.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
Commission File No. 0-28274
SYKES ENTERPRISES, INCORPORATED
(Exact name of Registrant as specified in its charter)
Florida 56-1383460
- -------------------------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
100 North Tampa Street, Suite 3900, Tampa, FL 33602
Registrant's telephone number, including area code: (813) 274-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of November 13, 2001, there were 40,204,623 shares of
common stock outstanding.
Page 1 of 46
The Exhibit Index Appears on Page 24
PART I
ITEM 1 - FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS' REPORT.
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------- ---------
ASSETS
Current assets
Cash and cash equivalents ............................... $ 57,521 $ 30,141
Receivables ............................................. 85,543 135,609
Prepaid expenses and other current assets ............... 16,444 17,679
--------- ---------
Total current assets .................................. 159,508 183,429
Property and equipment, net ............................... 147,543 151,842
Intangible assets, net .................................... 7,696 8,861
Deferred charges and other assets ......................... 8,459 13,822
--------- ---------
$ 323,206 $ 357,954
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt .................. $ 1 $ 100
Accounts payable ........................................ 11,842 34,636
Income taxes payable .................................... 1,312 5,502
Accrued employee compensation and benefits .............. 29,998 32,746
Other accrued expenses and current liabilities .......... 12,831 17,481
--------- ---------
Total current liabilities ............................. 55,984 90,465
Long-term debt ............................................ -- 8,759
Deferred grants ........................................... 40,335 31,758
Deferred revenue .......................................... 24,609 31,072
Other long-term liabilities ............................... 13 8
--------- ---------
Total liabilities ..................................... 120,941 162,062
--------- ---------
Contingencies
Shareholders' equity
Preferred stock, $0.01 par value, 10,000 shares
authorized; no shares issued and outstanding .......... -- --
Common stock, $0.01 par value, 200,000 shares authorized;
43,161 and 43,084 issued .............................. 432 431
Additional paid-in capital .............................. 160,060 159,696
Retained earnings ....................................... 100,187 90,430
Accumulated other comprehensive loss .................... (17,659) (14,082)
--------- ---------
243,020 236,475
Treasury stock at cost; 3,000 and 2,981 shares .......... (40,755) (40,583)
--------- ---------
Total shareholders' equity ............................ 202,265 195,892
--------- ---------
$ 323,206 $ 357,954
========= =========
See accompanying notes to condensed consolidated financial statements.
2
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
(in thousands, except for per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(Unaudited - (Unaudited -
not covered not covered
by accountants' by accountants'
report) report)
Revenues ......................................... $ 112,742 $ 136,954 $ 376,415 $ 455,462
--------- --------- --------- ---------
Operating expenses:
Direct salaries and related costs .............. 71,323 87,940 238,448 288,233
General and administrative ..................... 40,518 52,064 123,958 146,765
Compensation expense associated with exercise
of options ................................... -- -- -- 7,836
Restructuring and other charges ................ -- -- -- 9,640
--------- --------- --------- ---------
Total operating expenses ..................... 111,841 140,004 362,406 452,474
--------- --------- --------- ---------
Income (loss) from operations .................... 901 (3,050) 14,009 2,988
--------- --------- --------- ---------
Other income (expense):
Interest, net .................................. 65 (380) 197 (2,708)
Gain on sale of equity interest in SHPS ........ -- -- -- 84,036
Other .......................................... 74 (1,054) (260) (923)
--------- --------- --------- ---------
Total other income (expense) ................. 139 (1,434) (63) 80,405
--------- --------- --------- ---------
Income (loss) before provision (benefit) for
income taxes and cumulative effect of change
in accounting principle ........................ 1,040 (4,484) 13,946 83,393
Provision (benefit) for income taxes ............. (667) (1,660) 4,189 24,956
--------- --------- --------- ---------
Income (loss) before cumulative effect of change
in accounting principle ........................ 1,707 (2,824) 9,757 58,437
Cumulative effect of change in accounting
principle, net of income taxes of $580 ......... -- -- -- (919)
--------- --------- --------- ---------
Net income (loss) ................................ $ 1,707 $ (2,824) $ 9,757 $ 57,518
========= ========= ========= =========
Net income (loss) per basic share:
Income (loss) before cumulative effect of change
in accounting principle ...................... $ 0.04 $ (0.07) $ 0.24 $ 1.39
Cumulative effect of change in accounting
principle ..................................... -- -- -- (0.02)
--------- --------- --------- ---------
Net income (loss) per basic share .............. $ 0.04 $ (0.07) $ 0.24 $ 1.37
========= ========= ========= =========
Total weighted average basic shares .............. 40,175 41,134 40,162 41,910
========= ========= ========= =========
Net income (loss) per diluted share:
Income (loss) before cumulative effect of change
in accounting principle ...................... $ 0.04 $ (0.07) $ 0.24 $ 1.39
Cumulative effect of change in accounting
principle .................................... -- -- -- (0.02)
--------- --------- --------- ---------
Net income (loss) per diluted share ............ $ 0.04 $ (0.07) $ 0.24 $ 1.37
========= ========= ========= =========
Total weighted average diluted shares ............ 40,520 41,134 40,429 41,997
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
3
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000, THREE MONTHS ENDED DECEMBER 31, 2000 AND
NINE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
Accumulated
Common Common Additional Other
Stock Stock Paid-in Retained Comprehensive Treasury
(in thousands) Shares Amount Capital Earnings Income (Loss) Stock Total
--------- --------- --------- --------- --------- --------- ---------
Balance at January 1, 2000 ......... 42,734 $ 427 $ 155,023 $ 43,643 $ (5,860) $ -- $ 193,233
Issuance of common stock ........... 316 3 3,022 -- -- -- 3,025
Purchase of treasury stock ......... -- -- -- -- -- (37,906) (37,906)
Comprehensive income:
Net income for the nine months .. -- -- -- 57,518 -- -- 57,518
ended September 30, 2000
Foreign currency translation
adjustment ................... -- -- -- -- (11,250) -- (11,250)
---------
Total .................. 46,268
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 2000
(Unaudited - not covered by
accountants' report) ............ 43,050 430 158,045 101,161 (17,110) (37,906) 204,620
Issuance of common stock ........... 34 1 186 -- -- -- 187
Purchase of treasury stock ......... -- -- -- -- -- (2,677) (2,677)
Tax-effect of exercise of
non-qualified stock options........ -- -- 1,465 -- -- -- 1,465
Comprehensive loss:
Net loss for the three months
ended December 31, 2000 ...... -- -- -- (10,731) -- -- (10,731)
Foreign currency translation
adjustment ................... -- -- -- -- 3,028 -- 3,028
---------
Total .................. (7,703)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 2000
(Unaudited - not covered by
accountants' report) ............ 43,084 431 159,696 90,430 (14,082) (40,583) 195,892
Issuance of common stock ........... 77 1 364 -- -- -- 365
Purchase of treasury stock ......... -- -- -- -- -- (172) (172)
Comprehensive income:
Net income for the nine months
ended September 30, 2001..... -- -- -- 9,757 -- -- 9,757
Foreign currency translation
adjustment ................... -- -- -- -- (3,577) -- (3,577)
---------
Total .................. 6,180
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 2001 ...... 43,161 $ 432 $ 160,060 $ 100,187 $ (17,659) $ (40,755) $ 202,265
========= ========= ========= ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
(in thousands) 2001 2000
--------- ---------
(Unaudited - not
covered by accountants'
report)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 9,757 $ 57,518
Depreciation and amortization ......................... 26,580 27,455
Cumulative effect of accounting change, net of tax .... -- 919
Gain on sale of equity interest in SHPS ............... -- (84,036)
Write-down of intangible assets ....................... -- 1,185
Deferred income tax provision (benefit) ............... 232 (1,019)
Loss on disposal of property and equipment ............ 555 400
Loss on sale of marketable securities ................. -- 200
Changes in assets and liabilities:
Receivables ......................................... 48,391 (26,419)
Prepaid expenses and other current assets ........... 800 2,470
Deferred charges and other assets ................... 5,025 396
Accounts payable .................................... (20,784) (6,690)
Income taxes payable ................................ (4,547) 2,556
Accrued employee compensation and benefits .......... (2,040) 4,183
Customer deposits, net of restricted cash ........... -- 10,921
Other accrued expenses and current liabilities ...... (6,337) 663
Deferred revenue .................................... (3,058) 5,327
Other long-term liabilities ......................... (1,076) (1,393)
--------- ---------
Net cash provided by (used for) operating activities 53,498 (5,364)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................. (25,657) (55,331)
Proceeds from sale of property and equipment .......... 542 --
Proceeds from sale of equity interest in SHPS (less
cash purchased) ..................................... -- 159,776
--------- ---------
Net cash (used for) provided by investing activities (25,115) 104,445
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paydowns under revolving line of credit agreements .... (13,363) (153,014)
Borrowings under revolving line of credit agreements .. 13,336 90,672
Payments of long-term debt ............................ (8,408) (1,077)
Borrowings under long-term debt ....................... -- 367
Proceeds from issuance of stock ....................... 365 3,025
Purchase of treasury stock ............................ (172) (37,906)
Proceeds from grants .................................. 9,155 6,020
--------- ---------
Net cash provided by (used for) financing activities 913 (91,913)
--------- ---------
EFFECT OF EXCHANGE RATES ON CASH ......................... (1,916) (11,249)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... 27,380 (4,081)
Cash and cash equivalents - beginning .................... 30,141 31,001
--------- ---------
Cash and cash equivalents - ending ....................... $ 57,521 $ 26,920
========= =========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ........................................ $ 935 $ 3,191
Income Taxes .................................... $ 8,372 $ 12,880
See accompanying notes to condensed consolidated financial statements.
5
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
Sykes Enterprises, Incorporated and consolidated subsidiaries ("Sykes" or the
"Company") provides outsourced customer management solutions and services.
Sykes' Business Solutions group provides professional services in e-commerce and
customer relationship management (CRM) with a focus on business strategy
development, project management, business process redesign, change management,
knowledge management, education, training and web development. Sykes' Business
Services group provides customer care outsourcing services with emphasis on
technical support and customer service. These services are delivered through
multiple communication channels encompassing phone, e-mail, web and chat. Sykes'
services are provided to customers on a worldwide basis primarily within the
technology, communications and financial services markets.
NOTE 1 - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles") for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. In
addition, certain reclassifications have been made for consistent presentation.
Operating results for the three and nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for any future
quarters or the year ending December 31, 2001. For further information, refer to
the restated consolidated financial statements and notes thereto, included in
the Company's Form 10-K/A for the year ended December 31, 2000 as filed with the
Securities and Exchange Commission (SEC).
ACCOUNTING CHANGE FOR REVENUE RECOGNITION - During the fourth quarter of 2000,
the Company adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. Based on criteria established by SAB 101, adopted retroactive to January 1,
2000, the Company modified its accounting treatment for the recognition of
revenue as it related to contract services. Revenues, in certain limited
situations, that were recognized as services were performed and as the related
fees became collectible under agreements between the Company and its customers
are deferred until either a final contract or purchase order has been fully
executed.
The cumulative effect of the change on prior years resulted in a charge to
income of $0.9 million (net of income taxes of $0.6 million), or $0.02 per
diluted share, which has been deducted in the determination of net income for
the nine months ended September 30, 2000. The effect of this change for the nine
months ended September 30, 2000 was to increase income before cumulative effect
of the change in accounting principle by $0.9 million or $0.02 per diluted
share.
The cumulative effect adjustment of $0.9 million (net of income taxes of $0.6
million) as of January 1, 2000 was recognized in income during the three-month
period ended in March 31, 2000.
DEFERRED GRANTS - Recognition of income associated with grants of land and the
acquisition of property, buildings and equipment is deferred until after the
completion and occupancy of the building and title has passed to the Company and
the funds have been released from escrow. The deferred amounts for both land and
building are amortized and recognized as a reduction of depreciation expense
included within general and administrative costs over the corresponding useful
lives of the related assets. Amounts received in excess of the cost of the
building are allocated to the cost of equipment and, only after the grants are
released from escrow, recognized as a reduction of depreciation expense over the
weighted average useful life of the related equipment, which approximates five
years. Amortization of the deferred grants that is included in income for the
three months ended September 30, 2001 and 2000 was $0.9 million and $0.8
million, respectively, and for the nine months ended September 30, 2001 and 2000
was $1.6 million and $1.9 million, respectively.
6
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS (continued)
RECENT ACCOUNTING PRONOUNCEMENTS - Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company adopted SFAS No. 133 effective January
1, 2001, and the adoption of SFAS No. 133 had no impact on the financial
position, results of operations, or cash flows of the Company.
In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which is effective for transfers after March
31, 2001. This statement is effective for disclosures about securitizations and
collateral transactions and for recognition and reclassification of collateral
for fiscal years ending after December 15, 2000. SFAS No. 140 replaces SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of the provisions of SFAS
No. 125 without reconsideration. The adoption of SFAS No. 140 had no impact on
the financial position, results of operations, or cash flows of the Company.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method will be prohibited.
SFAS No. 142 changes the accounting for goodwill from an amortization method to
an impairment-only approach. Thus, amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of SFAS No.
142, which is effective for the Company on January 1, 2002. The Company is
currently evaluating the effect, if any that the adoption of SFAS No. 142 will
have on the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, and development and (or) normal use of the asset. The Company is
required and plans to adopt the provisions of SFAS No. 143 for the quarter
ending March 31, 2003. Because of the effort necessary to comply with the
adoption of SFAS No. 143, it is not practicable for management to estimate the
impact of adopting this Statement at the date of this report.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The objective of SFAS No. 144 is to establish one accounting
model for long-lived assets to be disposed of by sale as well as resolve
implementation issues related to SFAS No. 121. The Company expects to adopt SFAS
No. 144 effective January 1, 2002 and does not expect such adoption to have a
material impact on the financial condition, results of operations, or cash
flows of the Company.
7
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 2 - CONTINGENCIES
A consolidated class action lawsuit against the Company is pending in the
United States District Court for the Middle District of Florida. The plaintiffs
purport to assert claims on behalf of a class of purchasers of Sykes' common
stock during the period from July 27, 1998 through September 18, 2000. The
consolidated action claims violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Among
other things, the consolidated action alleges that during 2000, 1999, and 1998,
the Company and certain of its officers made materially false statements
concerning the Company's financial condition and its future prospects. The
consolidated complaint also claims that certain of the Company's quarterly
financial statements during 1999 and 1998 were not prepared in accordance with
generally accepted accounting principles. The consolidated action seeks
compensatory and other damages, and costs and expenses associated with the
litigation. Although the Company believes these claims are without merit and
intends to defend the actions vigorously, it cannot predict the outcome or the
impact this action may have on the Company. The Company also cannot predict
whether any other material suits, claims, or investigations may arise in the
future based on the same claims. The outcome of this lawsuit or any future
lawsuits, claims, or investigations relating to the same subject matter may
have a material adverse impact on the Company's financial condition and results
of operations.
During the quarter ended September 30, 2001, the Company successfully settled
the lawsuit filed by Kyrus Corporation that asserted functionality issues
associated with software that Kyrus had licensed from the Company in 1998. In
settlement of the lawsuit, the Company returned 1.0 million shares of Kyrus
convertible preferred stock originally received in exchange for the license
(having a value on the Company's books of $5.5 million) offset by a $5.0 million
cash payment the Company received from its insurance carrier. The remaining $0.5
million investment in the Kyrus preferred stock was written off against
previously established reserves, and accordingly, there was no impact of this
settlement on the results of operations for the quarter ended September 30,
2001.
The Company from time to time is involved in other legal actions arising in the
ordinary course of business. With respect to these matters, management believes
that it has adequate legal defenses and/or provided adequate accruals for
related costs such that the ultimate outcome will not have a material adverse
effect on the Company's financial position or results of operations.
A lease agreement, relating to the Company's customer support center in Ireland,
contains a cancellation clause which requires the Company, in the event of
cancellation, to restore the facility to its original state at an estimated cost
of $0.3 million as of September 30, 2001 and pay a cancellation fee of $0.4
million, which approximates the annual rental payments under the lease
agreement. In addition, under certain circumstances (including cancellation of
the lease and cessation of the support center's operations in the facility), the
Company is contingently liable until June 16, 2005 to repay any proceeds
received in association with the facility's grant agreement. As of September 30,
2001, the grant proceeds subject to repayment approximated $1.2 million. As of
September 30, 2001, the Company had no plans to cancel this lease agreement.
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The Company presents data in the Condensed Consolidated Statements of Changes
in Shareholders' Equity in accordance with SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes rules for the reporting of
comprehensive income and its components. Total comprehensive income was $4.3
million for the three months ended September 30, 2001 compared to a total
comprehensive loss of $6.2 million for the three months ended September 30,
2000 and total comprehensive income of $6.2 million and $46.3 million for the
nine months ended September 30, 2001 and 2000, respectively.
8
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 4 - RESTRUCTURING AND OTHER CHARGES
The Company recorded restructuring and other charges during the second and
fourth quarters of 2000 approximating $30.5 million. The second quarter
restructuring and other charges approximating $9.6 million resulted from the
Company's consolidation of several European and one U.S. fulfillment center and
the closing or consolidation of six professional services offices. Included in
the second quarter 2000 restructuring and other charges was a $3.5 million lease
termination payment related to the corporate aircraft. As a result of the second
quarter restructuring, the Company reduced the number of employees by 157 during
2000 and satisfied the remaining lease obligations related to the closed
facilities during 2001.
The Company also announced, after a comprehensive review of operations, its
decision to exit certain non-core, lower margin businesses to reduce costs,
improve operating efficiencies and focus on its core competencies of technical
support, customer service and consulting solutions. As a result, the Company
recorded $20.9 million in restructuring and other charges during the fourth
quarter of 2000 related to the closure of its U.S. fulfillment operations, the
consolidation of its Tampa, Florida technical support center and the exit of its
worldwide localization operations. Included in the fourth quarter 2000
restructuring and other charges is a $2.4 million severance payment related to
the employment contract of the Company's former President. In connection with
the fourth quarter restructuring, the Company reduced the number of employees by
245 during the first half of 2001 and expects the remaining lease obligations
related to the closed facilities to be completed by December 2001.
The major components of restructuring and other charges established during the
second and fourth quarters of 2000 are as follows (in thousands):
Restructuring Other Total
------- ------- -------
Severance and related costs ........ $ 1,614 $ 2,360 $ 3,974
Lease termination costs ............ 1,765 3,639 5,404
Write-down of property and equipment 14,088 103 14,191
Write-down of intangible assets .... 6,086 -- 6,086
Other .............................. 813 -- 813
------- ------- -------
$24,366 $ 6,102 $30,468
======= ======= =======
A summary of the activity in the restructuring and other charges liability
accounts for the three and nine months ended September 30, 2001 is as follows
(in thousands):
Restructuring Other Total
------- ------- -------
Three Months Ended September 30, 2001:
Balance remaining as of July 1, 2001 .. $ 918 $ 1,689 $ 2,607
Reduction in workforce cash outflows .. (154) (91) (245)
Lease termination cash payments ....... (283) -- (283)
Other cash outflows ................... -- -- --
------- ------- -------
Balance remaining at September 30, 2001 $ 481 $ 1,598 $ 2,079
======= ======= =======
9
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 4 - RESTRUCTURING AND OTHER CHARGES (continued)
Restructuring Other Total
------- ------- -------
Nine Months Ended September 30, 2001:
Balance remaining as of January 1, 2001 $ 2,708 $ 2,360 $ 5,068
Reduction in workforce cash outflows .. (702) (762) (1,464)
Lease termination cash payments ....... (807) -- (807)
Other cash outflows ................... (718) -- (718)
------- ------- -------
Balance remaining at September 30, 2001 $ 481 $ 1,598 $ 2,079
======= ======= =======
NOTE 5 - LONG TERM DEBT
Long-term debt consists of the following (in thousands):
Sept. 30, Dec. 31,
2001 2000
-------- --------
Syndicated multi-currency credit facility, $15.0 million maximum,
due February 2002, interest payable in accordance with the terms
of the individual promissory notes outstanding; the facility is
guaranteed by a pledge of 66% of common stock of certain subsidiaries ....... $ -- $ 8,759
Notes payable and capital leases, principal and interest payable in
monthly installments through June 2002, interest at varying rates up
to prime plus 1 percent, collateralized by certain equipment ............... 1 100
-------- --------
Total debt .......................................................... 1 8,859
Less current portion ................................................ 1 100
-------- --------
Long-term debt ...................................................... $ -- $ 8,759
======== ========
On June 22, 2001, the Company amended and restated its existing syndicated
credit facility with a syndicate of lenders (the "Amended Credit Facility").
Pursuant to the terms of the Amended Credit Facility, the amount of the
Company's revolving credit facility is $100.0 million (previously $150.0
million). The $100.0 million Amended Credit Facility includes a $10.0 million
swingline loan to be used for working capital purposes. In addition, the Company
amended and restated its $15.0 million multi-currency credit facility
("Multi-Currency Facility") that provides for multi-currency lending. Borrowings
under the Amended Credit Facility bear interest, at the Company's option, at (a)
the lender's base rate plus an applicable margin of up to 0.50% or (b) a Euro
rate plus an applicable margin of up to 2.25%. Borrowings under the $10.0
million swingline loan bear interest, at the Company's option, at (a) the
lender's base rate plus an applicable margin of up to 0.25% or (b) a Quoted Rate
for swingline loans. Borrowings under the $15.0 million Multi-Currency Facility
bear interest, at the Company's option, at (a) the lender's base rate plus an
applicable margin of up to 0.50% or (b) a quoted Euro rate for swingline loans.
The Company paid aggregate financing fees of approximately $0.3 million, which
have been deferred and are being amortized over the term of the Amended Credit
Facility and Multi-Currency Facility. In addition, a commitment fee up to 0.40%
is to be charged on any unused portion of the Amended Credit Facility on a
quarterly basis. The Amended Credit Facility matures on February 28, 2003, and
the Multi-Currency Facility matures on February 28, 2002. Borrowings under the
Amended Credit Facility are guaranteed by certain of the Company's subsidiaries
as evidenced by a pledge of 66% of the respective subsidiary's common stock.
Under the terms of the Amended Credit Facility and Multi-Currency Facility, the
Company is required to maintain certain financial ratios and other financial and
non-financial conditions. The Amended Credit Facility and Multi-Currency
Facility prohibit, without the consent of the syndicated lenders, the Company
from incurring additional indebtedness, limits certain investments, advances or
loans and restricts substantial asset sales, acquisitions, capital expenditures,
stock repurchases and cash dividends. At September 30, 2001, the Company was in
compliance with all loan requirements.
10
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 6 - INCOME TAXES
As a result of shifts in the Company's mix of earnings within tax jurisdictions
and the benefits associated with the implementation of findings from a strategic
tax review initiated during the third quarter of 2001, the Company reported a
benefit for income taxes of $0.7 million for the third quarter of 2001 and a
provision for income taxes of $4.2 million for the nine months ended September
30, 2001. The tax benefit resulted primarily from the liquidation of an
international entity during the third quarter of 2001. The Company's effective
tax rate differs from the statutory federal income tax rate primarily due to the
beneficial effects of the strategic tax review, the effects of foreign, state
and local income taxes, foreign income not subject to federal and state income
taxes, non-deductible intangibles and other permanent differences.
Earnings associated with the Company's investment in its foreign subsidiaries
are considered to be permanently invested and no provision for United States
federal and state income taxes on those earnings or translation adjustments has
been provided.
As a result of the shifts in the mix of earnings and the strategic tax review
discussed above, the Company anticipates an estimated annual effective tax rate
for the year ending December 31, 2001 of approximately 32%.
NOTE 7 - EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common
shares outstanding during the periods. Diluted earnings per share includes the
weighted average number of common shares outstanding during the respective
periods and the further dilutive effect, if any, from stock options using the
treasury stock method.
The numbers of shares used in the earnings per share computation are as follows
(in thousands):
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------ ------ ------ ------
Basic:
Weighted average common shares outstanding ......... 40,175 41,134 40,162 41,910
Diluted:
Dilutive effect of stock options ..................... 345 -- 267 87
------ ------ ------ ------
Total weighted average diluted shares outstanding 40,520 41,134 40,429 41,997
====== ====== ====== ======
NOTE 8 - STOCK OPTIONS
The Company's 2001 Equity Incentive Plan (the "2001 Plan") was adopted by the
Company's Board of Directors on March 15, 2001 and approved by the Company's
shareholders on April 26, 2001. The 2001 Plan permits the granting of options,
stock appreciation rights and other stock-based awards to purchase up to 7.0
million shares of the Company's common stock to eligible employees and certain
non-employees, who provide services to the Company, at not less than the fair
value at the time the options, stock appreciation rights and other stock-based
awards are granted. The term of the options, stock appreciation rights and other
stock-based awards granted under the 2001 Plan cannot exceed a period of ten
years from the date of grant.
Upon adoption of the 2001 Plan, the Company terminated the 1996 Employee Stock
Option Plan, the 1997 Management Incentive Stock Option Plan and the 2000 Stock
Option Plan and the related options available for future grant under these plans
of approximately 0.7 million shares, 2.4 million shares and 2.9 million shares,
respectively. The options previously granted under these plans are not affected
and continue to be governed by their respective plans.
11
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 8 - STOCK OPTIONS (continued)
Transactions related to options granted under the 2001 Plan are summarized as
follows:
Weighted
Average
Shares Exercise
(in thousands) Price
------ ------
Outstanding at January 1, 2001 .. -- $ --
Granted ....................... 165 $10.01
Exercised ..................... -- $ --
Expired or terminated ......... -- $ --
------
Outstanding at September 30, 2001 165 $10.01
======
Options available for future grant 6,835
======
No options under the 2001 Plan are exercisable at September 30, 2001.
The following table further summarizes information about the 2001 Plan at
September 30, 2001:
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Range Of At Remaining Exercise At Exercise
Exercise Prices Sept. 30, 2001 Life Price Sept. 30, 2001 Price
-------------------- ---------------- ------------- ------------ -------------- ---------
(in thousands) (in thousands)
$ 5.75 to $ 5.98 15 9.6 $ 5.83 -- $ --
$ 8.65 to $ 8.94 60 9.9 $ 8.70 -- $ --
$ 10.11 40 9.7 $ 10.11 -- $ --
$ 12.75 50 9.8 $ 12.75 -- $ --
-----------
Total 165 9.8 $ 10.01 -- $ --
===========
No stock appreciation rights or other stock-based awards granted under the 2001
Plan are outstanding as of September 30, 2001.
NOTE 9 - SEGMENT REPORTING AND MAJOR CLIENT
The Company has two reportable segments comprised of regional operating segments
aggregated into reportable segments, entitled Business Services and Business
Solutions. The Business Services group is comprised of the Company's technical
and customer support and fulfillment businesses. The Business Solutions group
provides professional services in e-commerce, including information technology
(IT) staffing, and customer relationship management (CRM) with a focus on
business strategy development, project management, business process redesign,
change management, knowledge management, education, training and web
development. There has been no change in the basis of the Company's segmentation
or in the measurement of segment profit as compared with the Annual Report on
Form 10-K/A for the year ended December 31, 2000.
Business Services' revenue includes $11.4 million, or 10.1% of consolidated
revenues, and $38.5 million, or 10.2% of consolidated revenues, for the three
and nine months ended September 30, 2001, respectively, from a major provider of
communications services. This compared to $13.3 million, or 9.7% of consolidated
revenues, and $18.3 million, or 4.0% of consolidated revenues, for the three and
nine months ended September 30, 2000, respectively.
12
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
NOTE 9 - SEGMENT REPORTING AND MAJOR CLIENT (continued)
Information about the Company's reportable segments for the three months and
nine months ended September 30, 2001 compared to the corresponding prior year
periods is as follows (in thousands):
Consolidated
Business Services Business Solutions Other Total
--------- --------- --------- ---------
Three Months Ended September 30, 2001:
Revenue .................................. $ 104,067 $ 8,675 $ -- $ 112,742
Depreciation and amortization ............ 8,169 126 -- 8,295
Income (loss) from operations ............ $ 1,547 $ (646) $ -- $ 901
Other income ............................. 139 139
Benefit for income taxes ................. 667 667
---------
Net income ............................... $ 1,707
=========
Three Months Ended September 30, 2000:
Revenue .................................. $ 124,479(1) $ 12,475(2) $ -- $ 136,954
Depreciation and amortization ............ 7,796 332 -- 8,128
Loss from operations ..................... $ (2,095)(1) $ (955)(2) $ -- $ (3,050)
Other expense ............................ (1,434) (1,434)
Benefit for income taxes ................. 1,660 1,660
---------
Net loss ................................. $ (2,824)
=========
Nine Months Ended September 30, 2001:
Revenue .................................. $ 347,840 $ 28,575 $ -- $ 376,415
Depreciation and amortization ............ 26,259 321 -- 26,580
Income (loss) from operations ............ $ 15,683 $ (1,674) $ -- $ 14,009
Other expense ............................ (63) (63)
Provision for income taxes ............... (4,189) (4,189)
---------
Net income ............................... $ 9,757
=========
Nine Months Ended September 30, 2000:
Revenue .................................. $ 414,832(1) $ 40,630(2) $ -- $ 455,462
Depreciation and amortization ............ 26,687 768 -- 27,455
Income from operations before compensation
expense associated with exercise of
options and restructuring and other
charges................................. $ 20,062(1) $ 402(2) $ -- $ 20,464
Compensation expense associated with
exercise of options .................... (7,836) (7,836)
Restructuring and other charges .......... (9,640) (9,640)
Other income ............................. 80,405 80,405
Provision for income taxes ............... (24,956) (24,956)
Cumulative effect of change in accounting
principle ............................. (919) (919)
---------
Net income ............................... $ 57,518
=========
(1) For the three and nine months ended September 30, 2000, Business Services'
revenue includes $4.4 million and $56.1 million, respectively, from SHPS,
Incorporated, a previously wholly owned subsidiary of the Company, which was
sold in June 2000, and U.S. fulfillment, a business in which the Company exited
in connection with the fourth quarter 2000 restructuring. The Company continues
to operate its European fulfillment business. Additionally, income (loss) from
operations includes a loss of $1.2 million and $0.4 million for the three and
nine months ended September 30, 2000, respectively, from SHPS and U.S.
fulfillment.
(2) For the three and nine months ended September 30, 2000, Business Solutions'
revenue includes $1.9 million and $7.1 million, respectively, from the Company's
localization operations, a business in which the Company exited in connection
with the fourth quarter 2000 restructuring. Additionally, income (loss) from
operations includes a loss of $0.4 million and $0.5 million for the three and
nine months ended September 30, 2000, respectively, from localization.
13
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Sykes Enterprises, Incorporated:
We have reviewed the accompanying condensed consolidated balance sheet of Sykes
Enterprises, Incorporated and subsidiaries (the "Company") as of September 30,
2001, the related condensed consolidated statements of operations for the three-
and nine-month periods ended September 30, 2001, and of changes in shareholders'
equity and cash flows for the nine-month period ended September 30, 2001. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
October 29, 2001
14
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion should be read in conjunction with the condensed consolidated
financial statements and notes included elsewhere in this report and in the
Sykes Enterprises, Incorporated (the "Company") Annual Report on Form 10-K/A for
the year ended December 31, 2000 filed with the Securities and Exchange
Commission.
Management's discussion and analysis may contain forward-looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995)
that are based on current expectations, estimates, forecasts, and projections
about the Company, management's beliefs, and assumptions made by management. In
addition, other written or oral statements, which constitute forward-looking
statements, may be made from time to time by or on behalf of Sykes. Words such
as "believe," "estimate," "project," "expect," "intend," "may," "anticipate,"
"plans," "seeks," variations of such words, and similar expressions are intended
to identify such forward-looking statements. Similarly, statements that describe
the Company's future plans, objectives, or goals also are forward-looking
statements. These statements are not guarantees of future performance and are
subject to a number of risks and uncertainties, including those discussed below
and elsewhere in this report. The Company's actual results may differ materially
from what is expressed or forecasted in such forward-looking statements, and
undue reliance should not be placed on such statements. All forward-looking
statements are made as of the date hereof, and Sykes undertakes no obligation to
update any such forward-looking statements, whether as a result of new
information, future events or otherwise.
Factors that could cause actual results to differ materially from what is
expressed or forecasted in such forward-looking statements include, but are not
limited to: (i) the timing of significant orders for Sykes' products and
services, (ii) variations in the terms and the elements of services offered
under Sykes' standardized contract including those for future bundled service
offerings, (iii) changes in applicable accounting principles or interpretations
of such principles, (iv) difficulties or delays in implementing Sykes' bundled
service offerings, (v) failure to achieve sales, marketing and other objectives,
(vi) construction delays of new technical and customer support centers, (vii)
delays in the Company's ability to develop new products and services and market
acceptance of new products and services, (viii) rapid technological change, (ix)
loss of significant customers, (x) risks inherent in conducting business abroad,
(xi) currency fluctuations, (xii) fluctuations in business conditions and the
economy, (xiii) Sykes' ability to attract and retain key management personnel,
(xiv) Sykes' ability to continue the growth of its support service revenues
through additional technical and customer service centers, (xv) Sykes' ability
to further penetrate into vertically integrated markets, (xvi) Sykes' ability to
expand its global presence through strategic alliances and selective
acquisitions, (xvii) Sykes' ability to continue to establish a competitive
advantage through sophisticated technological capabilities, (xviii) the ultimate
outcome of pending class action lawsuits, (xix) Sykes' ability to recognize
deferred revenue through delivery of products or satisfactory performance of
services, (xx) Sykes' dependence on trend toward outsourcing, (xxi) risk of
emergency interruption of technical and customer support center operations,
(xxii) the existence of substantial competition and (xxiii) other risk factors
listed from time to time in Sykes' registration statements and reports as filed
with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Revenues
For the three months ended September 30, 2001, the Company recorded consolidated
revenues of $112.7 million, a decrease of $24.2 million or 17.7%, from $136.9
million of consolidated revenues for the comparable period during 2000.
Exclusive of U.S. fulfillment and the Company's localization operations from
which the Company exited in connection with the fourth quarter 2000
restructuring, revenues decreased $18.0 million or 13.8% for the three months
ended September 30, 2001, from $130.7 million for the comparable period during
2000. This decrease in revenue was the result of a $16.0 million or 13.4%
decrease in Business Services' revenues, exclusive of
15
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Revenues (continued)
U.S. fulfillment operations, and a decrease of $2.0 million or 18.3% from
Business Solutions' revenues, exclusive of the Company's localization
operations.
The decrease in Business Services' revenues for the three months ended September
30, 2001 was primarily attributable to continued delays in sales due to cautious
spending decisions and reductions in clients and client volumes as a result of
the economic slowdown. The Company's Business Services' revenues were also
affected by continued declines in European fulfillment revenues due to lower
overall demand and cutbacks from clients that are challenged by the current
economic and market environment.
The decrease in Business Solutions' revenues for the three months ended
September 30, 2001, was primarily due to competitive pricing pressures and a
decline in the demand for professional services, including information
technology (IT) staffing, from clients who have been affected by the economic
slowdown and have reacted by delaying IT projects.
Direct Salaries and Related Costs
Direct salaries and related costs decreased $16.6 million or 18.9% to $71.3
million for the three months ended September 30, 2001, from $87.9 million in
2000. As a percentage of revenues, direct salaries and related costs decreased
to 63.3% in 2001 from 64.2% for the comparable period in 2000. The decrease in
the dollar amount of direct salaries and related costs was primarily
attributable to a $5.5 million decrease in direct salaries and related costs
associated with U.S. fulfillment and the Company's localization operations. As a
percentage of revenues, direct salaries and related costs, exclusive of U.S.
fulfillment and the Company's localization operations, increased slightly to
63.3% in 2001 from 63.1% for the comparable period in 2000.
General and Administrative
General and administrative expenses decreased $11.6 million or 22.3% to $40.5
million for the three months ended September 30, 2001, from $52.1 million in
2000. As a percentage of revenues, general and administrative expenses decreased
to 35.9% in 2001 from 38.0% for the comparable period in 2000. The decrease in
the dollar amount of general and administrative expenses was primarily
attributable to a $2.4 million decrease in general and administrative expenses
associated with U.S. fulfillment and the Company's localization operations, a
$2.9 million decrease in bad debt expense, a $1.4 million decrease in telephone,
a $2.5 million decrease in legal costs, a $4.0 million decrease in other general
and administrative costs offset by a $1.0 million increase in professional fees
from a strategic tax review initiative and a $0.6 million increase in
depreciation and amortization associated with facility and capital equipment
expenditures incurred in connection with both technology infrastructure and the
expansion of the Company's technical and customer support centers. As a
percentage of revenues, general and administrative expenses, exclusive of U.S.
fulfillment and the Company's localization operations, decreased to 35.9% in
2001 from 38.0% for the comparable period in 2000.
Other Income and Expense
Other income increased $1.6 million to $0.2 million for the three months ended
September 30, 2001, compared to other expense of $1.4 million for the comparable
2000 period. This increase was attributable to a loss on disposal of property
and equipment of $0.4 million recorded in the third quarter of 2000 and a
decrease of $0.5 million in interest expense associated with a decrease in the
Company's average outstanding debt position. The Company had no outstanding debt
during the third quarter of 2001 compared to an average outstanding debt balance
of $15.6 million for the comparable 2000 period. The decrease in the average
debt balance is principally due to the repayment of debt from the net cash flows
provided by operating activities.
16
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Provision (Benefit) for Income Taxes
The benefit for income taxes decreased $1.0 million to $0.7 million for the
three months ended September 30, 2001 from $1.7 million for the comparable
period in 2000. This decrease was primarily attributable to a reduction in the
Company's effective tax rate due to shifts in the Company's mix of earnings
within tax jurisdictions, the benefits associated with the implementation of
findings from a strategic tax review initiated during the third quarter of 2001
and the liquidation of an international entity. The Company's annual effective
tax rate was 32.0%, taking into consideration the aforementioned items resulting
in the recognition of a tax benefit for the three months ended September 30,
2001. The annual effective tax rate differs from the statutory federal income
tax rate primarily due to the beneficial effects of the strategic tax review,
the effects of foreign, state and local income taxes, foreign income not subject
to federal and state income taxes, non-deductible intangibles and other
permanent differences.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Revenues
For the nine months ended September 30, 2001, the Company recorded
consolidated revenues of $376.4 million, a decrease of $79.1 million or 17.4%,
from $455.5 million of consolidated revenues for the comparable period during
2000. Exclusive of SHPS, in which 93.5% of the Company's ownership interest was
sold on June 30, 2000, and exclusive of U.S. fulfillment and the Company's
localization operations, from which the Company exited in connection with the
fourth quarter 2000 restructuring, revenues decreased $16.6 million or 4.2% for
the nine months ended September 30, 2001 to $375.7 million, from $392.3 million
for the comparable period during 2000. This decrease in revenue was the result
of an $11.6 million or 3.2% decrease in Business Services' revenues, exclusive
of SHPS and U.S. fulfillment operations and a decrease of $5.0 million or 14.8%
from Business Solutions' revenues, exclusive of the Company's localization
operations.
The decrease in Business Services' revenues for the nine months ended September
30, 2001 was primarily attributable to continued delays in sales due to cautious
spending decisions and reductions in clients and client volumes as a result of
the economic slowdown. The Company's revenues were also affected by continued
declines in European fulfillment revenues due to lower overall demand and
cutbacks from clients that are challenged by the current economic and market
environment and a $3.5 million one-time licensing fee recorded during the
comparable period in 2000.
The decrease in Business Solutions' revenues for the nine months ended September
30, 2001, was primarily due to competitive pricing pressures and a decline in
the demand for professional services, including IT staffing, from clients who
have been affected by the economic slowdown and have reacted by delaying IT
projects.
Direct Salaries and Related Costs
Direct salaries and related costs decreased $49.7 million or 17.2% to $238.5
million for the nine months ended September 30, 2001, from $288.2 million in
2000. As a percentage of revenues, (excluding the $3.5 million one-time
licensing fee in 2000) direct salaries and related costs increased slightly to
63.4% in 2001 from 63.3% for the comparable period in 2000. The decrease in the
dollar amount of direct salaries and related costs was primarily attributable to
a $44.7 million decrease in direct salaries and related costs associated with
SHPS, U.S. fulfillment and the Company's localization operations and a $4.7
million decrease in direct material costs associated primarily with the European
fulfillment services. As a percentage of revenues, direct salaries and related
costs, exclusive of SHPS, U.S. fulfillment, the Company's localization
operations, and the $3.5 million one-time licensing fee in 2000 increased to
63.4% in 2001 from 62.0% for the comparable period in 2000.
17
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
General and Administrative
General and administrative expenses decreased $22.8 million or 15.5% to $124.0
million for the nine months ended September 30, 2001, from $146.8 million in
2000. As a percentage of revenues (excluding the $3.5 million one-time licensing
fee in 2000), general and administrative expenses increased to 32.9% in 2001
from 32.5% for the comparable period in 2000. The decrease in the dollar amount
of general and administrative expenses was primarily attributable to a $20.1
million decrease in general and administrative expenses associated with SHPS,
U.S. fulfillment and the Company's localization operations, a $1.6 million
decrease in telephone, a $2.5 million decrease in bad debt expense and a $4.1
million decrease in other general and administrative costs. This decrease was
offset by a $1.0 million increase in professional fees from a strategic tax
review initiative and a $4.5 million increase in depreciation and amortization
associated with facility and capital equipment expenditures incurred in
connection with both technology infrastructure and the expansion of the
Company's technical and customer support centers. As a percentage of revenues,
general and administrative expenses, exclusive of SHPS, U.S. fulfillment, the
Company's localization operations and the $3.5 million one-time licensing fee in
2000, remained unchanged at 32.9% for both 2001 and for the comparable period in
2000.
Compensation Expense
Compensation expense associated with the exercise of options was $7.8 million
for the nine months ended September 30, 2000. This charge related to payments
made to certain SHPS' option holders as part of the Company's sale of a 93.5%
ownership interest in SHPS that occurred on June 30, 2000.
Restructuring and Other Charges
The Company recorded restructuring and other charges of $9.6 million during the
nine months ended September 30, 2000. These charges were associated with (1) the
consolidation of certain of the Company's fulfillment operations; (2) the
consolidation of certain of the Company's professional services locations; (3)
elimination of redundant property, leasehold improvements and equipment; and (4)
lease termination costs associated with vacated properties and transportation
equipment.
Other Income and Expense
Other expense was $0.1 million during the nine months ended September 30, 2001,
compared to $3.6 million during the comparable 2000 period, exclusive of the
gain on sale of SHPS of $84.0 million. This decrease was attributable to a
decrease of $2.9 million in interest expense associated with a decrease in the
Company's average outstanding debt position. The Company's average outstanding
debt balance for the first nine months of 2001 was $3.0 million compared to
$67.8 million for the first nine months of 2000. The decrease in the average
debt balance is principally due to the repayment of debt from net cash flows
provided by operating activities and the proceeds generated from the sale of
SHPS.
On June 30, 2000, the Company sold 93.5% of its ownership interest in SHPS for
$165.5 million cash. The sale of SHPS resulted in a gain for financial
accounting purposes of $84.0 million ($59.9 million net of taxes).
18
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Provision for Income Taxes
The provision for income taxes decreased $20.8 million to $4.2 million for the
nine months ended September 30, 2001 from $25.0 million for the comparable
period in 2000. The decrease in the provision for income taxes was primarily
attributable to the decrease in income for the nine months ended September 30,
2001 (as the comparable period in 2000 included the gain on sale of SHPS),
shifts in the Company's mix of earnings within tax jurisdictions and the
benefits associated with the implementation of findings from a strategic tax
review initiated during the third quarter of 2001. The Company's effective tax
rate was 30.0% for the nine months ended September 30, 2001 and 29.9% for the
comparable 2000 period. The effective tax rate differs from the statutory
federal income tax rate primarily due to the beneficial effects of the strategic
tax review, the effects of foreign, state and local income taxes, foreign income
not subject to federal and state income taxes, non-deductible intangibles and
other permanent differences.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows generated by operating
activities and from available borrowings under its credit facilities. The
Company has utilized its capital resources to make capital expenditures
associated primarily with its technical and customer support services, invest in
technology applications and tools to further develop the Company's service
offerings and for working capital and other general corporate purposes. In
future periods, the Company intends similar uses of any such funds, including
possible acquisitions providing access to certain geographic markets.
In the first nine months of 2001, the Company generated $53.5 million in cash
from operating activities and $9.1 million in cash from grant proceeds which
were used primarily to invest $25.7 million in capital expenditures, pay down
$8.4 million in borrowings under the Company's credit facilities and increase
available cash $27.4 million.
Net cash flows provided by operating activities for the nine months ended
September 30, 2001 was $53.5 million compared to net cash flows used for
operating activities of $5.4 million for the comparable period in 2000. The
$58.9 million increase in net cash flows provided by operating activities,
($25.2 million decrease in net cash flows including as operating cash flows the
gain on sale of SHPS as of June 30, 2000), was a result of a decrease in net
income of $47.8 million, and a net decrease in non-cash expenses of $0.6 million
offset by a net increase in assets and liabilities of $23.2 million. This net
increase in assets and liabilities of $23.2 million was principally due to a
decrease of $74.8 million in receivables, primarily due to increased collection
efforts and a decrease in revenues, a decrease of $5.0 million in other assets,
related to the settlement of the Kyrus lawsuit, offset by a decrease in deferred
revenue of $8.4 million, primarily related to revenue for diagnostic software, a
decrease in income taxes payable of $7.1 million, primarily related to the taxes
on the gain on the sale of an equity interest in SHPS, and a decrease of $37.9
million in accounts payable and other accrued accounts.
Capital expenditures, which are generally funded by cash generated from
operating activities and borrowings available under its credit facilities, were
$25.7 million for the nine months ended September 30, 2001 compared to $55.3
million for the nine months ended September 30, 2000. Capital expenditures for
2001 were $29.6 million lower than the comparable period of 2000, or $26.0
million lower excluding SHPS. In 2001, approximately 75% of the capital
expenditures were the result of investing in new and existing technical and
customer support centers and 25% was expended for systems infrastructure and
other assets. The Company anticipates capital expenditures in the range of $36.0
million to $38.0 million for the year 2001.
The primary sources of cash flows from financing activities are from borrowings
under the Company's syndicated credit facility, as amended on June 22, 2001,
with a syndicate of lenders (the "Amended Credit Facility"). Pursuant to the
terms of the Amended Credit Facility, the amount of the Company's revolving
credit facility is $100.0 million. The $100.0 million Amended Credit Facility
includes a $10.0 million swingline loan to be used for
19
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
working capital purposes. In addition, the Company has a $15.0 million
multi-currency credit facility that provides for multi-currency lending. The
Amended Credit Facility matures on February 28, 2003, and the multi-currency
facility matures on February 28, 2002. At September 30, 2001, the Company had
$57.5 million in cash and cash equivalents and $115.0 million of availability
under its credit facilities.
The Company believes that its current cash levels, accessible funds under its
credit facilities and cash flows from future operations, will be adequate to
meet its debt repayment requirements, continued expansion objectives and
anticipated levels of capital expenditures for the foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in non-U.S. currency exchange rates. The Company is exposed to non-U.S. exchange
rate fluctuations as the financial results of non-U.S. subsidiaries are
translated into U.S. dollars in consolidation. As exchange rates vary, those
results, when translated, may vary from expectations and adversely impact
overall expected profitability. The cumulative translation effects for
subsidiaries using functional currencies other than the U.S. dollar are included
in accumulated other comprehensive income in shareholders' equity. Movements in
non-U.S. currency exchange rates may affect the Company's competitive position,
as exchange rate changes may affect business practices and/or pricing strategies
of non-United States based competitors. Under its current policy, the Company
does not use non-U.S. exchange derivative instruments to manage its exposure to
changes in non-U.S. currency exchange rates.
At September 30, 2001, the Company had no debt outstanding at variable interest
rates. Based on the Company's level of variable rate debt outstanding during the
first nine months of 2001, a one-point increase in the weighted average interest
rate would increase the Company's annual interest expense by approximately $0.3
million. (The variable interest rates are generally equal to the Eurodollar rate
plus an applicable margin). The Company has not historically used derivative
instruments to manage its exposure to changes in interest rates.
FLUCTUATIONS IN QUARTERLY RESULTS
For the year ended December 31, 2000, quarterly revenues as a percentage of
total annual revenues were approximately 27%, 26%, 23% and 24%, respectively,
for the first through fourth quarters of the year. The Company has experienced
and anticipates that in the future it will continue to experience variations in
quarterly revenues. The variations are due to general economic conditions, the
timing of new contracts and renewal of existing contracts, the timing of the
expenses incurred to support new business, the timing and frequency of client
spending for e-commerce and e-business activities, non-U.S. currency
fluctuations, and the seasonal pattern of technical and customer support, and
fulfillment services.
20
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
PART II - OTHER INFORMATION.
ITEM 1 - LEGAL PROCEEDINGS.
Reference is made to Part I, Item 3 "Legal Proceedings" of the Registrant's
Annual Report on Form 10-K/A for the year ended December 31, 2000. Since
November 14, 2001, the Company has not been named as a defendant in any action,
which, to the best of the Company's knowledge, could have a material adverse
effect on the financial condition or results of operations of the Company other
than the actions described below.
A. Class Action Litigation.
A consolidated class action lawsuit against the Company is pending in the United
States District Court for the Middle District of Florida. The plaintiffs purport
to assert claims on behalf of a class of purchasers of Sykes' common stock
during the period from July 27, 1998 through September 18, 2000. The
consolidated action claims violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Among
other things, the consolidated action alleges that during 2000, 1999 and 1998,
the Company and certain of its officers made materially false statements
concerning the Company's financial condition and its future prospects. The
consolidated complaint also claims that certain of the Company's quarterly
financial statements during 1999 and 1998 were not prepared in accordance with
generally accepted accounting principles. The consolidated action seeks
compensatory and other damages, and costs and expenses associated with the
litigation. Although the Company believes these claims are without merit and
intends to defend the actions vigorously, it cannot predict the outcome or the
impact this action may have on the Company. The Company also cannot predict
whether any other material suits, claims, or investigations may arise in the
future based on the same claims. The outcome of this lawsuit or any future
lawsuits, claims, or investigations relating to the same subject matter may have
a material adverse impact on the Company's financial condition and results of
operations.
During the quarter ended September 30, 2001, the Company successfully settled
the lawsuit filed by Kyrus Corporation that asserted functionality issues
associated with software that Kyrus had licensed from the Company in 1998. In
settlement of the lawsuit, the Company returned 1.0 million shares of Kyrus
convertible preferred stock originally received in exchange for the license
(having a value on the Company's books of $5.5 million) offset by a $5.0 million
cash payment the Company received from its insurance carrier. The remaining $0.5
million investment in the Kyrus preferred stock was written off against
previously established reserves; and accordingly, there was no impact of this
settlement on the results of operations for the quarter ended September 30,
2001.
B. Other Litigation.
The Company from time to time is involved in other legal actions arising in the
ordinary course of business. With respect to these matters, management believes
that it has adequate legal defenses and/or provided adequate accruals for
related costs such that the ultimate outcome will not have a material adverse
effect on the Company's financial position or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5 - OTHER INFORMATION.
None.
21
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following documents are filed as an exhibit to this Report:
10.7 Employment Agreement dated as of March 6, 2000, as amended
July 6, 2001, between Gerry L. Rogers and Sykes Enterprises,
Incorporated.
10.9 Employment Agreement dated as of March 6, 2000, as amended
July 6, 2001, between Charles E. Sykes and Sykes Enterprises,
Incorporated.
10.36 Employment Agreement dated as of March 6, 2000, as amended
July 6, 2001, between Jenna R. Nelson and Sykes Enterprises,
Incorporated.
15 Letter regarding unaudited interim financial information.
(b) Reports on Form 8-K
None.
22
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYKES ENTERPRISES, INCORPORATED
(Registrant)
Date: November 14, 2001 By: /s/ W. Michael Kipphut
W. Michael Kipphut
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
23
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
EXHIBIT INDEX
Exhibit
Number
------
10.7 Employment Agreement dated as of March 6, 2000, as amended
July 6, 2001, between Gerry L. Rogers and Sykes Enterprises,
Incorporated.
10.9 Employment Agreement dated as of March 6, 2000, as amended
July 6, 2001, between Charles E. Sykes and Sykes Enterprises,
Incorporated.
10.36 Employment Agreement dated as of March 6, 2000, as amended
July 6, 2001, between Jenna R. Nelson and Sykes Enterprises,
Incorporated.
15 Letter regarding unaudited interim financial information
24